Rising markets and improved performance

City of London has announced a trading statement for 2017Q3. Funds under management have grown to $4.4bn. Rising equity markets have been the main reason behind this rise, with the MSCI Emerging Markets Index up 11% over the quarter. On the debit side there were net redemptions of $140m, reducing the net rise in City of London’s FUM to 8%. There was also a return to positive performance in the funds with 90% of exposure outperforming the relevant benchmarks, a welcome improvement after a tough period in the preceding six months.

• Pipeline: The new business pipeline remains active, with over $350m of potential mandates. While short term performance should have little affect on progress with these, the positive sentiment it generates may be helpful.
• Operations: The net margin on new business is 84bps, a slightly faster decline than we had predicted. Run rate operating profit before profit share is £1.5m per month, an improvement over the £1.4m at the end of Q2.
• Valuation: The prospective P/E of 9.7 times is at a significant discount to the peer group. The historic yield of 6.2% is very attractive and should at the very least provide support for the shares in the current volatile markets. At current market levels we’d expect dividend cover to be more than restored in 2017.
• Risks: To date, City of London has not experienced the sort of outflows that some other emerging market fund managers have, aided by its good performance and strong client servicing. Further EM volatility may increase the risk of such outflows however.
• Investment summary: City of London has continued to show robust performance in challenging market conditions. The valuation remains reasonable. At current FUM and exchange rates, dividend cover will return to a comfortable position and investors can perhaps start thinking about future increases.